Client Affairs

Investors Lose Billions From "Scrip Dividend" Offers - Practitioners

Tom Burroughes, Group Editor, London, 18 January 2019

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A practice relating to how dividends are paid to investors has been attacked by a law firm and specialist firm arguing that investors are being potentially denied billions of pounds in returns.

With all the seemingly relentless focus on sustainable investment, it is easy to lose sight of how investors might be missing out on big sums from something rather more basic in terms of day-to-day market behaviour.

A recent study produced just before the turn of the year by Greenberg Traurig, the international law firm, said that asset managers are falling short in deciding what to do in the area known as “scrip dividends”.

A scrip dividend is the same as a normal dividend with the exception that the shareholder is given the choice of taking their dividend in the form of extra stock in place of the normal cash if they so wish. The company sets the cash amount of the dividend and then by using a reference price they offer an alternative amount of stock which is of equal value to the cash. However, the shareholder is then given around 30 days to decide and during these 30 days the price of the stock fluctuates so that the value of the cash dividend and stock dividend are no longer equal when the election deadline approaches. 

However, managers are still often electing for the one that is of less value, Jonny Ruck, chief executive of Scorpeo, a company specialising in tracking and capturing such corporate actions, told this publication in a recent call.

“In the majority of cases people are defaulting into cash,” Ruck said. Firms such as asset and wealth managers have a fiduciary responsibility to ensure clients do not lose out on scrip cases.

Greenberg Traurig analysed losses by investors, including some of the largest asset managers in a dataset comprised of all scrip dividends globally between 2011 and 2017. Average aggregate losses to beneficial owners from scrip dividends alone total $1.3 billion annually – and between 2011 and 2017, approximately $8.9 billion were missed. 

In 38 per cent of scrip dividends, the majority of shares were elected in a suboptimal manner, the report showed. Total losses from undersubscribed rights offerings exceed $100 million per year. There were fewer rights offerings than scrip dividends between 2011 and 2016, but the missed value was far larger - approximately $662 million out of $485 billion capital raised.

With regulators in the UK and abroad forcing firms to be more transparent about costs and protect clients from mis-selling – such as under the new MiFID II rules – there should be no excuse for not understanding the scrip dividend issue, Scorpeo’s Ruck said. 

“The problem the industry is facing is more daunting than many asset managers realise and the consequences of ignoring it are massive. Whether firms decide to leverage their own internal resources, or work with a corporate actions technology provider to put a system in place, asset managers need to act now,” Ruck added.

At Greenberg Traurig, Robert Frenchman, a shareholder at the firm, said regulators are going to crack down on the issue.

“It’s now only a matter of time before regulators commence investigations and enforcement cases and civil plaintiffs commence lawsuits against asset managers that systematically fail to maximise the value of corporate action determinations. We think the courts are especially likely to uphold fiduciary obligations, where many are knowingly failing to recover the full value of corporate action events that are the undisputed property of their investors,” he said. 

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